6 Cash Flow Problems faced by Businesses and how to Fix them
Cash flow is the lifeblood of every business. Once it is low or negative, the business' financial health is at risk.
According to Spenda, 82% of business failures can be attributed to cash flow problems. This points to the importance of a healthy cash flow for any business.
In this guide, you will understand how cash flow management for small businesses works, causes of cash flow problems, and tips for effective cash flow management. Let’s dig in.
What is cash flow?
Cash flow refers to how cash flows in and out of your business over time. It points to the amount of money that comes into your business in the form of revenue from sales, profits from investments, grant money, etc., and money that flows out of your business in terms of business expenses, loan repayments, salary payments, etc.
A healthy cash flow is when the business inflows are more than the outflows. In simple terms, more credit alerts over debit alerts!
You should read: Basic Accounting Terms every small business should know
Cash flow VS profit
Many business owners think their cash flow and profit are the same, but that is not so. Cash flow refers to the inflow and outflow of money into your business, while profit is what is left after deducting expenses from revenue.
When revenue exceeds expenses, you have a profit. However, when the expenses exceed revenue, that is a loss and where expenses and income are equal– that is a break-even point.
6 Causes of Cash Flow Problems faced by Businesses and how you can Fix them
Cash flow problems can have devastating effects on a business such as strained relationships with employees and vendors due to late payments, reduced customer satisfaction, running the business with personal funds, etc.
Here are 6 common causes of cash flow problems faced by small businesses and how to fix them:
1. Late payment
Here's the problem: When money that is supposed to be at hand is tied up with customers’ credit purchases and payments are made later than agreed, a cash flow problem would occur. This is because more money is flowing out than is coming in.
How to fix it: Send invoices out on time and have a payment policy, to ensure swift payment. And if there would be any delay, such would require a fore notice and/or a late payment penalty.
Also, have diverse payment options for customers to pay you through. This can include bank transfers, using a POS, using online channels like PayPal, etc.
2. Not creating a budget
Here's the problem: Cash flow problems can also result from not creating a business budget that helps you realistically capture your expenses and expected revenue over a period of time.
Having a set budget is key to ensuring that you are not spending more than you are earning, which could lead to a negative cash flow. It also ensures that you have a financial focus on what to spend on so that unnecessary and unplanned expenses do not eat into your business finances.
How to fix it: Always create a monthly business budget to guide your monthly expenses, helping you know how much you are making and how much you are spending. With this, you can allocate a specific amount to each spending category, helping you avoid overspending or underspending.
3. Not preparing emergency funds
Here's the problem: Not preparing emergency funds to fall on in slow months would lead you to scramble to stay afloat in periods of low sales or economic decline.
This is a common issue many small businesses make that puts them at a disadvantage in situations when there is an increase in the cost of production or when they need money for an urgent unplanned need in their business.
How to fix it: Create an emergency fund that you put money into weekly or monthly, as may be convenient for you. This ensures that you have enough cash in reserve to fund whatever expenses may come up in the course of running your business.
Related: 4 Financial Numbers to Track for Business Growth
4. Poor profit margins
Here's the problem: With a poor pricing strategy, small businesses fall into the trap of underpricing their products/services, leading to poor profit margins and negative cash flow. With a low profit margin, you will be undervaluing your product, and not reap the full rewards of your hard work.
How to fix it: Have a profitable pricing strategy that considers the cost of production, time, energy, and other costs, alongside a reasonable profit that makes your business profitable.
This is key to ensuring a positive cash flow, whereby you are not just making sales, but profitable sales that impact the business' bottom line.
With our pricing-for-profit guide and tool, you can learn about various pricing models and the right one for you, identify pricing challenges and how to overcome them, know when and how to increase product price without losing customers, and much more. Buy the full resource today.
5. Uncontrolled and unplanned growth
Here's the problem: Growth is good; however, when unprepared for and unplanned; growth can lead to a lot of problems for small businesses.
For example, if you want to open another physical store, you would need funds to finance getting another space, buying products to stock, employing new hands, etc. Without proper planning, you would start spending more than you are getting and this will pose a problem in your business cash flow.
How to fix it: To grow your business rapidly, without risking a negative cash flow, get a collateral-free loan to fund the expansion project. This guarantees that you are not growing at the risk of your business cash flow. Also, it ensures you have enough cash to run daily operations and fund emergency expenses that may come up.
6. Poor bookkeeping practice
Here's the problem: Not keeping a proper record of your business finances through accurate bookkeeping and sales forecasts is another reason for poor cash flow management. And this ultimately results in difficulty with tracking revenue and expenses.
How to fix it: To safeguard your business against financial hardships, adopt an accounting system or tool that helps you review your finances and keeps accurate records.
Cash Flow Projection
Doing a cash flow projection is a no-brainer if you want to be on top of your cash flow game. This should be done periodically, say every 3 to 6 months.
With a cash flow projection, you can plan for your monthly expected inflows and outflows, project slow periods of sales, possible increases in the cost of production, etc. This helps you plan on what to do, to ensure you are not running helter-skelter when things go a bit awry in the year.
Our cash flow guide helps you project your cash flow, and plan for any cash flow issues that may crop up, as you run your business. Your business deserves a copy.
Solidifying your Cash Flow for Business Success
A positive cash flow is like having enough blood running through your body. This is a clear signal of good health and vitality, and the same applies to your business. A positive cash flow enables you to adapt to economic changes, pay yourself, employees, and vendors, repay loans, purchase important items without breaking the bank, and ensure long-term business growth.
While a negative cash flow makes you unable to fund important business expenses, leading to stunted growth.
With our cash flow guide, you are hand-held in the process of recording, projecting, and planning your business cash flow, to ensure business financial success. Snatch your copy here!
Triift Africa is your business partner dedicated to helping you start, grow, and scale your business with access to collateral-free loans, business resources, and a business community to learn and network.
